UNIT17 - CREDIT (14 Days)
Understanding credit and the impact of its use and misuse are crucial to financial health.
EPF.13 The student will demonstrate knowledge of credit and loan functions by
a) evaluating the various methods of financing a purchase
(BUS6120.070)
Days1 and 2 Credit: Is it free? Is it worth it?
EPF.13 The student will demonstrate the knowledge of credit and loan functions by
e) comparing terms and conditions of various sources of consumer credit
(BUS6120.074)
Day 1 Where is credit obtained?
EPF.13 The student will demonstrate the knowledge of credit and loan functions by
c) identifying qualifications needed to obtain credit
g) explaining the need for a good credit rating
(BUS6120.072) (BUS6120.076)
Day 1 Creditworthiness and credit ratings
Day 2 Why credit ratings matter and what you can do to improve them
Day 3 Why credit ratings matter and what you can do to improve them, continued
EPF.13 The student will demonstrate the knowledge of credit and loan functions by
b) analyzing credit card features and their impact on personal financial planning
(BUS6120.071)
Day 1 Understanding your credit cards
EPF.13The student will demonstrate the knowledge of credit and loan functions by
d) identifying basic provisions of credit and loan laws
(BUS6120.073)
Day 1 and 2 Consumer loan laws
EPF.13The student will demonstrate the knowledge of credit and loan functions by
f) identifying strategies for effective debt management, including sources of assistance
(BUS6120.075)
Day 1 Managing your debt
EPF.13The student will demonstrate the knowledge of credit and loan functions by
h) comparing the costs and conditions of secured and unsecured loans
(BUS6120.077)
Day 1 What is a secured loan and what does it cost? What is an unsecured loan and what does it cost?
EPF.13The student will demonstrate the knowledge of credit and loan functions by
i) comparing the types of voluntary and involuntary bankruptcy and the implications of each
(BUS6120.078)
Days 1 and 2 Understanding bankruptcy
Evaluation Day
EPF.13 The student will demonstrate knowledge of credit and loan functions bya)evaluating the various methods of financing a purchase
Day 1and Day 2– Credit: Is it free? Is it worth it?
Content Knowledge
Credit is not free. Before borrowing money, consumers need to determine what the costs are and whether the benefits of obtaining credit are greater than those costs.
Vocabulary
Closed-end Credit – A loan where the entire amount is loaned at the beginning and all repayment and interest must be repaid by a specific date.
Collateral -Something of value (often a house or a car) pledged by a borrower as security for a loan. If the borrower fails to make payments on the loan, the collateral may be sold; proceeds from the sale may then be used to pay down the unpaid debt.
Installment Plan – A credit system where payment for goods is made with fixed payments over a period of time.
Layaway – A system where period payments are made on goods and upon final payment, the goods are delivered.
Open-end Credit – A loan where a total amount is set and the borrower can use any or the entire loan, repaying it over time, also known as a line of credit.
Rent-to-Own – An arrangement whereby consumers rent something (often furniture), making regular rental payments, and become owners of the rented object(s) after a specified period of time--sometimes automatically and sometimes with an additional payment. A legal business but very costly to consumers.
Revolving Credit – A credit system whereby the borrower can make periodic purchases and payments.
Secured Loan – Credit with collateral (for example, a house or a car) for the lender.
Unsecured Loan – Debt without collateral; credit card debt, for example.
Virginia Board of Education Framework
Some methods of financing a purchase are
- Installment plan
- Layaway
- Secured and unsecured loans
Some sources of financing are
- Retail stores
- Banks and credit unions
- Finance companies
- Pawn shops
- Payday loans
- Title loans
- Private lenders
Some types of credit are
- Open-end credit
- Closed-end credit
- Service credit
- Revolving credit
- Secured loans
- Unsecured loans
To use a decision model to determine which type of financing would be best, first establish the criteria.
The opportunity cost of using credit is the resulting decrease in future purchasing power; the individual will have less money to spend in the future as some of it will go toward repaying the loan or paying a credit card bill.
Teaching Tips
1)Discuss with students that most people who use credit, pay interest to use it. There are a few cases in which interest is not paid:
- People who pay off their credit card bill every month pay no interest, though there is usually an annual fee for the card.
- Layaway does not include payment of interest (and technically is not credit, since one does not have the use of the goods until they are paid off), but may involve restocking fees if the consumer changes his/her mind, and cash refunds may not be available. (See Consumer Reports article on layaway below.)
- Merchants often offer, for example, “90 days same as cash”, and as long as one pays off the balance within the specified number of days, there is no cost to the credit—however, there may be traps for the unwary in the form of additional fees. (Take a look at the MSNBC article below).
2) Conclude with a discussion of the benefits of credit in addition to allowing one to have the immediate use of the items purchased on credit. These can include rewards for using a credit card, the ability to use the card in an emergency, dispute resolution procedures that can allow one to avoid payment for a defective product or service, and the building of a credit history towards obtaining a loan for a car or a mortgage. In preparation for the next day’s lesson, leave students with the following question: “Can anyone get credit?”
3) Continue with an explanation of the rest of the types of credit listed in the framework. Make a chart of advantages and disadvantages of each type.Come back to the original point that use of almost any form of credit costs more than paying in full up front.The first thing a consumer needs to determine is whether to use credit at all. Is having the item at all, or having it now rather than later, worth the cost of what you’ll pay in interest and fees?(The lessons listed below contain scenarios that students use to decide whether the situation is an appropriate occasion for the use of credit.)
4) The budget needs to be the touchstone used in deciding whether any nonemergency use of credit can be repaid within a reasonable amount of time as to avoid overpaying for the item. Ask: How long will it take to repay, given the amount one can afford to spend within the item’s budget category? If one takes advantage of a sale by using a credit card, but is unable to pay off the credit card immediately, the interest cost needs to be added to the sale price to see whether one is actually benefiting from the sale or in fact overpaying.
Lessons and Resources
Financial Fitness for Life 9-12Lesson 11: What is Credit?
Financial Fitness for Life 9-12Lesson 12: Making Credit Choices
Credit for Beginners - online lesson
Your Credit Counts Challenge: Trainer’s Guide Section 3: Managing Credit (part 3.1 – 3.6)
Online reading
Consumer Reports article on layaway risks
MSNBC report on same-as-cash transactions
Day 1 - Where is credit obtained?
Content Knowledge
Credit is available from retailers, banks, credit unions, finance companies, payday loan and title loan companies and pawnbrokers. Terms offered by the various sources need to be compared to evaluate whether obtaining credit there is desirable.
Virginia Board of Education Framework
Consumers of credit should compare
- Percentage rates
- Annual fees
- Transaction fees
- Finance charges
- Risk of losing assets.
Consumers should consider costs and benefits of various sources, including
- Retailers
- Banks
- Credit unions
- Finance companies
- Risk-based lending companies (e.g., payday loan services, pawnbrokers, title loan services).
Teaching Tips
1) Based on their study of credit card statements, students should be able to offer some of the characteristics that determine the cost of a loan, including interest rate, annual fees, and late fees and penalties. Once a chart is developed, students can research current terms for loans from the various sources, either online or by obtaining information from local businesses.
2) Ask: Have you heard of “rent to own”? Is that a form of credit? (Yes, and an expensive one: consumers may pay two or three times the retail price of an item. See FTC report and Consumer Reports article on rent to own below.) What about pawn shops? (Many students may have seen television shows involving pawn shops.) Explain how pawn shops work.
2)Encourage your students to compare loans on the basis of the annual percentage rate (APR) and finance charge. Under the federal Truth in Lending Act, lenders must disclose these figures. Many people compare loans on the basis of the monthly payment. The monthly payment becomes lower if the repayment period is longer. Unfortunately, this also increases the finance charge. Avoid this confusion by determining the principal and repayment period first and then shop for the lowest APR.
Lessons and Resources
Personal Decision Making : Focus on Economics Lesson 10: Consumer Credit: Buy Now, Pay Later, and More Also online at:
Gen I Revolution: Mission 7: Alternative Financial Institutions
Federal Trade Commission report on rent to own
Consumer Reports article on rates of interest for rent-to-own
c) identifying qualifications needed to obtain credit
g) explaining the need for a good credit rating
Day 1 - Creditworthiness and credit ratings
Content Knowledge
Students should understand that lenders’decisions whether to grant credit are in some respects just an extension of decisions we make as individuals about whether to lend our money or property. The characteristics that make one a reliable bet as a borrower can be summed up in five Cs: Capacity, Capital, Character, Collateral and Conditions. Sometimes these five characteristics are combined to create three – Capacity, Character and Collateral. Capital is usually part of Collateral and Conditions would be included under Capacity. If borrowers don’t meet all these characteristics then they pose a greater risk to the lender, and will pay higher rates of interest to obtain credit.
Vocabulary
Annual Fee – The yearly charge for having a credit card or credit account.
Capacity – In the context of credit transactions, capacity is one of the Cs of Credit. It is an indicator of how creditworthy a prospective borrower is likely to be, as determined by the borrower's current and future earnings relative to current debt. High earnings and low debt, for example, indicate a strong capacity to make payments on the loan in question.
Capital – In the context of credit transactions, capital is one of the Cs of Credit. It is an indicator of how creditworthy a prospective borrower is likely to be as determined by the borrower's current financial assets and net worth.
Character – In the context of credit transactions, character is one of the Cs of Credit. It is an indicator of how creditworthy a prospective borrower is likely to be, as determined by the borrower's handling of past debts and his or her stability in jobs and residences.
Collateral – Something of value (often a house or a car) pledged by a borrower as security for a loan. If the borrower fails to make payments on the loan, the collateral may be sold; proceeds from the sale may then be used to pay down the unpaid debt.
Conditions – The general state of the economy. In periods of slow economic activity, lenders may be reluctant to lend out of fear that the borrower will be unable to pay.
Finance Charges – The total cost of credit, including interest and transaction fees.
Interest Rates – The price paid for using someone else's money, expressed as a percentage of the amount borrowed.
Transaction Fees – A charge for making a transaction. Transaction fees may be a percentage of the total amount or a flat rate regardless of size.
Virginia Board of Education Framework
13c: Character, capacity, capital, conditions and collateral are factors that determine creditworthiness.
Character refers to a borrower’s history of paying obligations.
Capacity refers to one’s ability to repay and is usually measured by current income and level of outstanding debt.
Capital refers to savings and other assets one can use to repay.
Conditions refer to other circumstances that may impact the ability to obtain credit (e.g., economic conditions).
Collateral refers to assets the borrower has that could be taken by the lender if the borrower fails to repay.
13g: Credit reporting agencies have established formulas to produce credit scores for each borrower.
Credit ratings are based on information in a person’s credit record, including income, payment history, employment record, and other personal factors.
Teaching Tips
1) Begin by asking the class about lending and borrowing in their everyday lives. Have they ever regretted lending money or something else to a friend or relative? Did it affect their willingness to lend again? If they had a bad experience, did they put more restrictions on lending to the same person a second time? Are there any parallels to the interactions between institutional lenders and their customers?
2) Ask: Can anyone qualify for a loan? Why not? What do lenders consider when making a decision whether to extend credit? The teacher should spend a considerable amount of time on the Cs of credit. Introduce the concept of credit ratings and credit score.
3) Ask: Is it simply a matter of qualifying or not qualifying for credit? If one does not qualify for one type of credit, are there alternatives? (Often there are –more expensive alternatives, such as payday loans.) Remind students about what they learned about risk and reward in studying types of investments. If lenders view consumers as a greater risk, they will demand higher interest to compensate for the additional risk.When the characteristics are better, the risk of making the loan will be lower--which often results in a lower interest rate. The teacher may want to use the video on the 5 Cs of Credit below as a summation.
Lessons and Resources
Financial Fitness for Life Grades 6-8Lesson 16: Establishing Credit
Hands On Banking Topic 4 Lesson 2: What is Credit? (addresses the 5 Cs)
Video
5 Cs of Credit
Interactive
Developing Good Credit Habits
Day 2 - Why credit ratings matter and what you can do to improve them
Content Knowledge
Many people don’t know how to access their credit rating, or why they should.
Vocabulary
Equifax – One of three credit reporting agencies.
Experian – One of three credit reporting agencies.
TransUnion – One of three credit reporting agencies.
Virginia Board of Education Framework
13.g: Making payments (e.g., bills, rent) on time helps an individual establish and maintain good credit.
Good credit scores may enhance one’s ability to borrow and the interest rate charged.
Credit scores may also help decrease one’s insurance rates and improve employment options.
Poor credit can adversely affect one’s ability to get a job, rent an apartment, obtain a car loan, obtain a security clearance—and may even bring an increase in car insurance.
Individuals should access their own credit reports before applying for credit or when denied credit.
To correct errors in one’s credit report, an individual should tell the consumer reporting company, in writing and with supporting documents, what information is inaccurate.
The consumer reporting company then must investigate the issue and correct the error.
Teaching Tips
1)Ask students if they have seen any commercials advertising “free credit reports.” Have them go online to determine if the reports from these sites are actually free. Then have students access the web page on Credit Reporting Agencies listed in the Lessons and Resources. Draw attention to the fact that everyone is entitled to one free credit report from each agency each year. Students should note they don’t have to pay for a credit report.
2)Break students into three groups and have each group report back on one of the three agencies. Be sure to have them also research how to report an error. Identity theft comes into this topic in that when identity theft has occurred, information will appear about transactions that were not entered into by the identity theft victim. Review what they learned in Unit 15 about how to avoid becoming a victim of identity theft.
3)Discuss the fact that employers, landlords, insurers, and auto finance companies are all interested in credit scores. Security clearances can also be affected.